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Water and Wastewater Privatization in England and Wales: An Advocate’s Perspective

Water and Wastewater Privatization in England and Wales:An Advocate’s Perspective

Elizabeth Brubaker Executive Director, Environment Probe

Prepared for British Columbia Water and Wastewater Association Workshop

Water Utilities in British Columbia: Industry Challenges and P3 Experiences

Richmond, BC
October 23, 2003

(Please click here for the PowerPoint slides that accompanied this talk.)

Thank you for inviting me to participate in this workshop. I have been looking forward for some time to having an opportunity to engage CUPE in a discussion about the UK’s experience with water and wastewater utility privatization. You can imagine my pleasure when I learned that you had invited CUPE’s Kathy Corrigan to this workshop to talk about this very subject.

The title of Ms. Corrigan’s speech was “British Water Privatization Experience: An Opponent’s Perspective.” Oddly, she never once mentioned the subject. She spoke of the private financing of hospitals, international trade agreements, and a variety of other issues. But she completely avoided the subject that she was supposed to address. I can only conclude that, after years of misinforming the public on this issue, CUPE finally understands that its arguments have no merit. It must have realized that its arguments couldn’t stand up to the scrutiny to which they were to be subjected today. It must have decided that it was safest not to expose as baseless its many claims about the British water experience.

Slide: Overview

Privatization in England and Wales certainly hasn’t been without its controversies. The process has not been a smooth one. The privatizing government, the new regulators, the new water companies – all of them have made mistakes. But they’ve learned from their mistakes. In many cases, they’ve corrected them. Yes, there’s still work to do. But there’s no denying that privatization has accomplished a great deal.

I’ll be reviewing some of these accomplishments in detail in the next half hour. I’ll be talking about the ways in which privatization has: increased capital investment; improved drinking water quality; improved environmental performance; improved regulation; and improved customer service.

But before I do so, let me give you an idea of what things looked like before privatization. You can’t evaluate private performance without having a baseline to compare it to.

Slide: Before Privatization

Before privatization, the water and sewage systems in Britain were a mess.

Drinking water was frequently below standard. I haven’t been able to find data for 1988 – the year before privatization. The figures on the screen are for 1990. That was just after privatization, but it was before most of the effects of privatization would have been felt. I think we can take these figures as a rough baseline.

England and Wales are divided into over two thousand drinking water zones. When the private firms took over, about twelve percent of these zones breached limits for faecal coliforms. Twenty-three percent breached limits for lead. Thirty percent breached limits for pesticides, and for iron.1

Sewage treatment was no better. The water authorities routinely discharged raw sewage. In 1988, 34 percent of the coastal beaches were polluted by sewage.2 (In fact, the number was likely even higher, since some of the polluted areas were simply not designated as beaches.)

Instead of regulating sewage pollution, the government did its best to hide it. David Kinnersley describes a “potent culture of government concealment.”3 He should know. He was the CEO of one of the water agencies before privatization, and later sat on the board of the National Rivers Authority, which was the environmental regulator set up after privatization.

Other environmental regulators have said the same thing about the lousy regulation before privatization. According to Lord Crickhowell, the chairman of the National Rivers Authority, the permit system was designed “to avoid an embarrassing number of failures and an excessive number of prosecutions of public organizations.”4

The problem was that the same public authorities were both providing sewage services and regulating them. One body was, to use the English expression, both the gamekeeper and the poacher. If the regulator prosecuted sewage polluters, it would prosecuting itself. Not surprisingly, prosecutions were very rare.

Slide: What Changed?

But Britain couldn’t comfortably ignore its sewage pollution forever. The European Community interfered. Back in 1975, the EC issued a directive that gave member countries ten years to bring their bathing waters up to uniform standards.

The prospect of doing so was quite intimidating. The government thought it would require £24 billion in new capital.5 It didn’t want the financing of this investment to be on the public books. It was, in David Kinnersley’s words, constrained by “the financial harness of Whitehall.”6 It was also constrained by politics – it wanted to avoid political responsibility for the price increases that would be required to support the new investment.

It was only natural that the government would look to the private sector for a solution. After all, this was the government of Margaret Thatcher. In 1984, it had privatized British Telecom. Two years later, it had privatized British Gas. It had experience with utility privatization and was confident with the process.

Slide: The Privatization Process

To prepare for privatization, the government tried to put the water authorities on a sound financial footing. It wrote off debts amounting to £5 billion. It also provided them with a so-called “green dowry” of £1.6 billion to help them meet the new European standards.7

It then transferred their infrastructure to 10 new “water service companies” and sold shares in these companies in a public offering. The flotation price was intentionally low, in order to ensure the offering’s success.

Last but by no means least, the government established three new regulators to oversee the private companies: one would regulate drinking water quality; one would regulate environmental performance; and one would regulate economic matters, such as investment and prices, along with customer service.

This combination of privatization and regulation worked wonders for the water and wastewater system. Let’s look at some of the results.

Slide: Capital Investment

One striking feature of privatization was that it spurred capital investment. Before privatization, in the 1980s, capital expenditures averaged £1.9 billion a year. Since privatization, they have averaged £3.5 billion a year.8

By the end of 2005, the private companies will have invested £50 billion – the equivalent of more than Cdn$110 billion.9That is an extraordinary level of investment. As one official from the Department of the Environment said to me, “You just couldn’t contemplate that kind of expenditure in the absence of privatization.”10

Now, there has been some debate about how efficiently that money has been spent. Some critics have said that some of the early investments were not cost-effective. Others have suggested that the water companies initially over-invested in infrastructure. But virtually everyone agrees that the investments produced much better drinking water and much cleaner sewage.

Let’s look at drinking water first.

Slide: Drinking Water Quality

“The quality of drinking water in England and Wales is the best it has ever been.” That’s what Chief Drinking Water Inspector Jeni Colbourne said this summer. In her annual report on drinking water quality, she praised “a decade of year on year improvement in compliance.” She attributed the improvements to investment by the water companies and to rigorous enforcement by her inspectors.11

The number of tests breaching standards has fallen sharply over the years. In 1990, 1 percent of the tests breached standards.12 In 2002, that number was down to 0.13 percent.13

In terms of specific contaminants, we’ve seen a wide array of improvements. In 1990, 12 percent of the water-supply zones breached limits for faecal coliforms. That figure was down to 5 percent in 1994,14 and down to 2.6 percent in 2002.15

Slide: Drinking Water Quality (continued)

In 1990, 30 percent of the water-supply zones breached limits for pesticides. That figure had dropped to 24 percent by 1994, and had dropped further to just two percent by 2002.

The taste of water has improved. In 1994, 1.3 percent of the water-supply zones breached limits for taste. That figure was down to 0.1 percent by 2002.

There have been other areas of improvement, as well. Drinking water now has less iron in it, less nitrate, less lead, and less aluminum. And it smells better.

Slide: Environmental Performance

Privatization also brought dramatic improvements in environmental performance. In Britain, “discharge consents” are similar to our Certificates of Approval. In 1990, 90 percent of the population was served by sewage treatment plants that met their discharge consents. In other words, 10 percent of the population was served by non-compliant plants. Compliance has gone way up since then. In the last few years, it has levelled off at 99 percent.16

The record on specific pollutants is impressive. In 1990, sewage treatment plants discharged about 140,000 tonnes of suspended solids. The water companies have since cut discharges in half. They have also reduced discharges of biochemical oxygen demand. In 1990, they discharged more than 110,000 tonnes. In 2002, that number was down to less than 40,000 tonnes.17

That said, the companies still have a lot of work to do. They caused 150 serious pollution incidents in 2002. That number is down from 658 in 1990, but it’s not good enough.18 As the Environment Agency says, “exemplaryperformance should be expected.”19

Slide: Fresh Water Quality

While the Environment Agency keeps the pressure on the water companies to continue improving, it doesn’t hesitate to praise their accomplishments. In 2001, it announced that “rivers and estuaries in England and Wales are probably cleaner than they have been since before the industrial revolution.” It went on to say, “otters, salmon and an abundance of fish and birds have returned to waterways, including many in urban and industrial heartlands.”20

The Environment Agency uses biological quality as an indicator of the overall health of rivers and canals. It measures the percentage of rivers and canals with good or fair biological quality. I’ve seen two different figures for 1990: 87 percent and 90 percent.21 In any case, by 2002, the figure had increased to 95 percent. Between 1990 and 2002, some 28 percent of rivers improved in biological quality.22 That’s a net figure.

The Environment Agency measures chemical quality as an indicator of organic pollution. In 1990, just 85 percent of rivers and canals had good or fair chemical quality. In 2002, the figure was 94 percent. Over that period, the chemical quality of a net 42 percent of rivers had improved.23

Another indicator of progress is the reduction in phosphates. In 1990, 64 percent of rivers had high concentrations of phosphates. The percentage was down to 54 in 2002.24

Slide: Leakage

The water companies have also made progress in reducing leakage. Before privatization, the water authorities lost more than a quarter of their treated water. Leakage rates remained stable for the first few years of privatization, and then began to worsen. They hit their peak in 1994-95, when companies were losing about 30 percent of their water. That was a particularly bad time to be losing a lot of water. The summer of 1995 was the second driest summer in more than 200 years. The drought continued into the following year. It inspired the regulator to crack down on leakage. As a result, leakage rates fell significantly – sometimes, by more than 10 percent a year. By 2001, leakage was 32 percent lower than it had been at the time of privatization.25

Slide: Sea Water Quality

Improvements in the quality of sea water have also been remarkable. These improvements are usually measured by the number of beaches that meet European standards for bathing waters.

You’ll remember that these standards were an impetus to privatization. At first, Britain tried to get around the standards by claiming that it didn’t have many bathing waters. In 1979, it designated only 27 beaches in England and Wales.26 That number had increased to 401 at the time of privatization, and is now at 482.27

The percentage of beaches complying with European standards has soared. Before privatization, just 66 percent of the beaches complied. In the first year of privatization, almost 76 percent complied. A decade later, the figure was up to 91 percent. And last year, 99 percent of the beaches complied.28

By the way, it was this increase in compliance that first interested me in privatization. I had been working on sewage pollution here in Canada, and came across a couple of articles describing the reductions in pollution in England and Wales. And I thought, “That’s very impressive – what’s going on over there?” What was going on was privatization. And with it, two essential changes: increased capital investment, which I’ve already talked about, and vastly improved regulation, which is what I want to turn my attention to now.

Slide: Environmental Regulation

As Karen Bakker pointed out in her governance handbook, “Despite having been privatized, the water industry in England has been re-regulated rather than de-regulated.”29

People often associate privatization with deregulation. But water utility privatization in the UKdid not in any way imply deregulation. On the contrary, it brought with it a new emphasis on regulation. It didn’t just establish new regulatory agencies. It also established a new zeal for regulation within those agencies.

Environmental regulation is far tougher than anything the country saw before privatization. That’s primarily thanks to the separation of the operator from the regulator. The regulator is no longer paralysed by conflicts of interest. As David Kinnersley said, it has a new “clarity of purpose.”30

And so, even as performance improved after privatization, the number of prosecutions surged upwards. The Environment Agency has demanded better and better performance. Two years ago, it called for “zero tolerance for pollution.”31

In 1999, the Agency published what it called a “Hall of Shame” to call attention to the country’s worst polluters, including several water companies. Its director of operations charged that these companies had “let down the public, the environment, and their own industry.”32

At the time, the Agency called on the courts to issue higher fines to polluters. That’s become one of its themes, and its having an impact. Water companies were fined almost £1 million in 2002.33

The Agency continues to press forward. Just last month, it proposed a new five-year, multi-billion-pound program to improve 4,000 sites.34

Slide: Price Increases

It goes without saying that all of these improvements have cost – and will continue to cost – money. It also goes without saying that consumers have been the ones to foot the bill. But it’s amazing how modest that bill has been.

At first, before the economic regulator found its feet, it looked like price increases would be problematic. Prices, in nominal terms, almost doubled in the first eight years of privatization.35 And there was nothing consumers could do to keep their water bills down. Very few people were on water meters, so they couldn’t reduce their bills by reducing their water use. Making things worse was the fact that water bills seemed to be rising so that the water companies could pay big salaries to their executives and big dividends to their investors. So there was a lot of resentment in the early years.

In 1999, the economic regulator turned things around and ordered an average 12 percent reduction in prices. The regulator argued that the water companies had discovered many efficiencies and would continue to do so. And he was right. During the 14 years since privatization, the average bill has increased by just 21.3 percent (in real terms).36 That’s extraordinary, given the billions that have been invested in the system.

Slide: Household Disconnections

Unfortunately, even moderate price increases were hard for some customers to handle. And water companies didn’t have a lot of patience with non-paying customers. Their practice of disconnecting them was probably the most criticized aspect of privatization. Mind you, the water companies didn’t invent disconnection. Their public predecessors had disconnected over 9,000 households a year in the two years before privatization.37 But disconnections more than doubled in the third year of privatization. They peaked in 1991-92 at over 21,000 households. They then fell steadily.38 In 1999, the new Water Industry Act banned disconnection of households and vulnerable water users such as day care centres, doctors’ offices, nursing homes, and schools.39

Slide: Disconnections Not Linked to Disease

It just so happens that the peak in disconnections coincided with a peak in cases of dysentery and hepatitis A. Opponents of privatization tried their hardest to establish a link between these peaks. But there simply wasn’t one.

I’ve reproduced just a few of many findings on this issue. The first is from Britain’s Chief Medical Officer, who said in 1992 that “there is no evidence at this stage that the two are connected.”40 The second is from the British Medical Association, two years later: “A causal link has yet to be established between water disconnections and infectious diseases, such as dysentery and hepatitis A.”41 The last is a more recent quote from Ofwat, the economic regulator: “Ofwat has seen little evidence of a link between water disconnections and public health.”42

Let me also read you an excerpt from an email from Hanna Lewis, a scientist with the Department of Health:

“no direct relationship has been established between levels of disconnections and reports of communicable disease in the UK. Up to 1999 there was a continuing lobby against water disconnections, alleging a link with the levels of dysentery. This was consistently refuted…. The increase in reports of dysentery in 1991-92 and the subsequent decrease thereafter is consistent with natural epidemic cycles, which show a pattern of upsurge every few years.”43

In any case, the point is now moot, since water companies aren’t allowed to disconnect domestic customers. And in fact, in this and other regards, their service to these customers is better than it’s ever been.

Slide: Accountability to Customers

As the Deputy Director General of Ofwat said five years into privatization, “In many ways, better customer care has developed more significantly than any other facet of the water industry.”44

Ofwat has developed what it calls a Guaranteed Standards Scheme. That scheme sets minimum standards for customer service. And it requires the water companies to compensate customers when service doesn’t meet those standards.45 Water companies have paid more than £7.6 million in compensation and rebates since 1991.46 That has given them a strong incentive to improve service.

Slide: Customer Service

And take a look at the results. There have been significant improvements in the percentage of properties at risk of low water pressure. And those subject to unplanned supply interruptions. And those at risk of flooding from sewers. There has also been a huge reduction in the percentage of billing contacts not responded to within five workings days. (That category includes queries from customers about their bills, or methods of payment, or change of address, etc.)47

Slide: ComparingEngland,Scotland,Ireland

I’ve been comparing the performance of England’s water companies before and after privatization. Another approach is to compare the performance of the private English water companies to that of their public counterparts in Scotland and Ireland. The Economistmagazine did this in May. It found that English utilities: score better on drinking water quality tests; comply more often with sewage discharge regulations; lose less water to leakage; and provide these superior services at lower costs to both households and commercial customers.

On this last point, most striking is the difference in commercial water bills: A medium-sized Scottish office pays 16 times more for water than does its English counterpart.

The Economistconcluded that “state ownership is costly and inefficient” and that “private water firms beat the public sector on all counts.”48

Slide: Water Companies’ Financial Challenges

The Economistrevisited water privatization in August. It asked, “How does the record look 14 years on?” Its answer was interesting. “In terms of quality, service delivery and efficiency, the answer is excellent; in terms of stock market performance, less so.”49

We got used to thinking of the water companies and their shareholders as fat cats during the early 1990s. Their profits and dividends were quite high. But recent years have been much leaner for them. In 1997, the new labour government imposed what it called a Windfall Tax on the privatized utilities. The water companies paid £1.65 billion. Two years later, as I mentioned, the economic regulator clawed back prices. The result has been a decline in profitability, dividends, and share prices. In May, The New York Timesreported that “the speculators and the global conglomerates [now] want out of the industry.” Ofwat, it said, “has scared off some would-be buyers by taking too strict a line with the industry.”50

This is a reminder of how difficult – and yet, how important – it is to maintain a balance between the interests of consumers and the interests of the water industry. I think that’s the biggest challenge facing the economic regulator today. In the early years of privatization, it favoured the water companies too much. But I fear that now it may be moving too far in the other direction. It’s important to ensure that the water companies have the financial means to carry out their functions. This is critical not only for the companies, but also for the consumers who rely on them.

Slide: Assessments of Privatization

I’ll leave the British experience with a few assessments of privatization on the screen.

I hope that as you’re thinking about what privatization has accomplished in England and Wales, you will turn your attention to what it might accomplish here in BC. As you know, many of BC’s water systems are in trouble. Waterborne diseases are common. Boil-water advisories are routine. Sewage is often not sufficiently treated. Standards are lax, and the enforcement of standards is even laxer. You are clearly facing some serious challenges. And meeting those challenges is going to cost billions. In 1998, the Canadian Water and Wastewater Association estimated that BC would need to invest more than $15 billion over 15 years.51

I doubt that full privatization is on anyone’s agenda. It seems unlikely to me that BC will be selling off its water and sewage systems any time soon. But municipalities have considered – and should continue to consider – involving the private sector in other ways. Private firms have a lot to offer our ailing systems. They can bring capital for long-delayed investments. They can bring tremendous expertise, gained from decades of experience. They can bring impressive efficiencies – efficiencies that enable them to stretch limited dollars. And perhaps most important, through enforceable contracts and stricter regulation, they can bring a new accountability.

We’ve learned important lessons from England and Wales. But it’s not necessary to follow the same route to privatization. Full privatization has much to recommend it. But other forms of privatization can also work well. Moncton – where a private firm financed, designed, built, and now operates a filtration plant – provides one model. Another option is the contracting out of operations and maintenance.

If you’d like more information on privatization, I’d urge you to visit our web site. We’ve posted many papers, studies, and articles on privatization. You can also find more information on privatization in my book, Liquid Assets. The book has chapters about both successes and failures, here in Canada and abroad. Throughout the book, I try to explain what works, what doesn’t work, and why. It might be useful to you.

With that bit of shameless self-promotion, I’ll close, and say that I look forward to this afternoon’s panel discussion on these issues. Thank you.

11. Drinking Water Inspectorate, “Tap Water Quality – Taken for Granted, A Measure of Trust?” Press release, July 9, 2003; and Jeni Colbourne, Letter to the Secretary of State for the Environment, Food and Rural Affairs and the Minister for Environment, Planning and Countryside, National Assembly for Wales, July 9, 2003.

12. Ofwat, Levels of Service for the Water Industry inEnglandandWales, 1998-99 Report, September 1999, p. 28.

25. Ofwat, Leakage of water in England and Wales, May 1996, pp. 4, 11; Ofwat, 1998-1999 Report on Leakage andWater Efficiency, December 1999, p. 3; and Ofwat, Leakage and the Efficient Use of Water, 2000-2001 Report, October 2001, p. 3.

26. Environment Agency, State of the Environment: Bathing Water Quality, 1999.

29. Karen Bakker, Good Governance in Restructuring Water Supply: A Handbook, Commissioned by the Federation of Canadian Municipalities and the Program on Water Issues at the University of Toronto’s Munk Centre for International Studies, July 2003, p. 18.

30. David Kinnersley, Coming Clean: The Politics of Water and the Environment(London: Penguin Books, 1994), p. 204.

When 6,000 homes in southeast London were without water for five days in September 2003, Thames Water faced compensation payments of more than £300,000. “A dry week for some 6,000 Londoners,” Edie Weekly Summaries, September 19, 2003.

46. Ofwat, Water and Regulation: Facts and Figures, May 2003.

47. Figures for 2002-03 from Ofwat, Levels of Service for the Water Industry inEngland&Wales, 2002-2003 Report, September 2003, p. 5. Figures for 1990-91 from Ofwat, Levels of Service for the Water Industry inEngland&Wales, 1999-2000 Report, July 2000, p. 6.